Deck 12: Statement of Cash Flows

Question 1

Only highly liquid investments with original maturities of less than six months at the date of purchase qualify as cash equivalents.

Answer 1

False

Question 2

Collection of principal on a note receivable is a cash flow from financing activities.

Answer 2

False

Question 3

Under the indirect method, depreciation expense is added to net income because it decreases net income but does not affect cash flow.

Answer 3

True

Question 4

The payment of interest on a note payable is a cash flow from a financing activity.

Question 5

Most companies use the direct method for disclosing their cash flows from operating activities rather than the indirect method.

Question 6

Cash collected from customers is a cash flow from operating activities and is calculated using the indirect method for preparing the statement of cash flows.

Question 7

The quality of income ratio can only be interpreted based on knowledge of a company's business operations and strategies.

Question 8

The quality of income ratio decreases when cash is used to pay accounts payable.

Question 9

The quality of income ratio measures the portion of net income that was generated by cash flow from operating activities.

Question 10

When accrued liabilities increase from the beginning to the end of the year, it means accrued expenses were greater than cash payments of such expenses, and, under the indirect method, the increase in accrued liabilities would be added to net income to convert to cash flow from operating activities.

Question 11

Under the indirect method, a decrease in inventory is subtracted from net income because inventory purchases are less than cost of goods sold.

Question 12

A higher quality of income ratio implies that operations tend to be financed internally without having to rely on external financing sources.

Question 13

Cash flows associated with property, plant, and equipment acquisition and disposition are reported as cash flows from investing activities.

Question 14

The quality of income ratio increases when depreciation expense is recorded.

Question 15

If sales revenue was $1,800,000 and accounts receivable decreased $40,000 while unearned revenue increased $10,000 during the year, then cash collected from customers equals $1,850,000.

Question 16

The statement of cash flows explains how the cash balance changed during a particular period of time.

Question 17

Cash flows associated with issuance and retirement of long-term debt and equity are reported as cash flows from investing activities.

Question 18

Under the indirect method, an increase in prepaid expenses is subtracted from net income, because the cash prepayments exceed the related expenses.

Question 19

The difference between the direct and indirect methods of cash flow statement preparation only affects the determination of cash flows from investing activities.

Question 20

Under the indirect method, an increase in accounts receivable during the year will be added to net income.

Question 21

Which of the following statements about the statement of cash flows is correct?

A) A company with a net loss on the income statement will always have a net cash outflow from operating activities.
B) A purchase of equipment is classified as a cash inflow from investing activities.
C)Cash dividends received on stock investments are classified as cash flows from operating activities.
D)Cash dividends paid are classified as cash flows from operating activities.

Question 22

The capital acquisitions ratio represents the portion of property, plant, and equipment purchases which could have been financed with cash flow from operating activities.

Question 23

Canadian Beer had a capital acquisitions ratio of 7.49, which means its net income exceeded its cash investment in property, plant and equipment by almost 7.5 times.

Question 24

Amortization of a patent reduces cash flows from investing activities.

Question 25

Wish Corporation acquired a computer for $15,000 and paid for it in full by issuing 1,000 shares of its own common stock, par $10 (current market price $15 share). This transaction should not be reported within the statement of cash flows because cash was neither received nor disbursed.

Question 26

Free cash flow measures the sufficiency of cash flow from operating activities to cover both capital expenditures for property, plant and equipment as well as the payment of dividends.

Question 27

Which of the following would be subtracted from net income when determining cash flows from operating activities under the indirect method?

A) An increase in accounts payable.
B) Depreciation expense.
C)A decrease in prepaid insurance.
D)A gain on the sale of a depreciable asset.

Question 28

Which of the following would not be considered a cash equivalent?

A) A 30-day certificate of deposit.
B) A ten-year treasury note purchased over nine years ago, which matures in two months.
C)A three-month Treasury bill.
D)A ten-year Treasury note purchased two months before maturity.

Question 29

Cash flows from financing activities include those cash flows with respect to issuing and retiring long-term debt and equity.

Question 30

Which of the following statements regarding use of the direct and indirect methods of determining cash flows from operating activities is incorrect?

A) The indirect method starts with net income.
B) The direct method calculates cash collected from customers.
C)The majority of U.S. companies use the indirect method.
D)The FASB recommends use of the indirect methoD.The FASB recommends use of the direct method.

Question 31

When a company sells equipment for cash at a loss, cash flows from investing activities decreases.

Question 32

Which of the following transactions would not create a cash flow from operating activities?

A) Collecting cash from a customer.
B) Paying cash to a supplier.
C)Paying cash to stockholders for dividends.
D)Paying cash for a utility bill.

Question 33

Which of the following transactions does not result in either a cash inflow or a cash outflow?

A) A company purchased some of its own stock from a stockholder.
B) Amortization of a patent.
C)Payment of a cash dividend.
D)Sale of equipment at book value.

Question 34

When a company purchases equipment using common stock, the equipment purchase is reported as a financing activity.

Question 35

Which of the following items about the statement of cash flows is correct?

A) Noncash expenses such as depreciation are subtracted from net income when using the indirect method for computing cash flows from operating activities.
B) Cash equivalents are highly liquid investments with maturities at the date of purchase of less than three months.
C)The acquisition of land by issuing bonds payable would not appear on the statement of cash flows.
D)Cash paid for interest would be classified as a financing cash flow.

Question 36

Which of the following transactions would be reported in the cash flow statement as a cash flow from financing activities?

A) The cash payment of interest expense.
B) Acquiring land by signing a note payable.
C)Paying cash to stockholders for dividends.
D)Purchasing shares of stock of another company using cash.

Question 37

Which of the following would not be a cash flow from financing activities?

A) Issuance of common stock for cash.
B) Borrowing cash on a long-term note payable.
C)Collection of a cash dividend.
D)Repayment of principal on a long-term note payable.

Question 38

Which of the following would not be a cash flow from investing activities?

A) Purchase of long-term investments.
B) Sale of a patent.
C)Collection of principal on a long-term note receivable.
D)Collection of interest revenue on a long-term note receivable.

Question 39

When a company borrows $150 million during the year and also repays $120 million of debt, the company can disclose the $30 million net amount as excess of borrowings over repayments in the financing activities section of the statement of cash flows.

Question 40

Cash flows from financing activities include those cash flows with respect to paying previously declared dividends.

Question 41

Which of the following transactions increases the quality of income ratio?

A) The accrual of revenue.
B) The accrual of an expense.
C)The cash payment of an account payable.
D)The payment of a cash dividenD.The quality of income ratio is cash flow from operating activities divided by net income. Accrued expenses are incurred but not paid. They reduce net income but do not reduce cash flow. The decrease in net income (the denominator) therefore increases the quality of income ratio.

Question 42

Which of the following would be subtracted from net income when determining cash flows from operating activities under the indirect method?

A) A decrease in utilities payable.
B) Patent amortization expense.
C)A decrease in prepaid rent.
D)A loss on the sale of a depreciable asset.

Question 43

Darwin Company, a manufacturer, has provided the following information pertaining to its recent year of operation: • Net income, $200,000
• Accounts receivable increased $18,000
• Prepaid insurance increased $7,000
• Depreciation expense was $25,000
• Loss on sale of a building was $22,000
• Wages payable increased $14,000
• Unearned revenue decreased $21,000
Using the indirect method, how much was Darwin's net cash provided by operating activities?

A) $227,000.
B) $215,000.
C)$171,000.
D)$257,000.

Question 44

Which statement regarding the indirect method is false?

A) Depreciation expense is added to net income.
B) An increase in accounts receivable is added to net income.
C)An increase in accounts payable is added to net income.
D)An increase in merchandise inventory is subtracted from net income.

Question 45

Which of the following statements about the quality of income ratio is correct?

A) When sales are growing, receivables and inventory normally increase faster than accounts payable so the ratio increases.
B) Seasonal variations in sales have no impact on the quality of income ratio.
C)Failure to accrue appropriate expenses will inflate net income and reduce the quality of income ratio.
D)The quality of income ratio is computed by dividing net income by cash flow from operating activities.

Question 46

A company reported net income of $200,000 during 2014. The company reported depreciation expense of $35,000, patent amortization of $10,000 and a $5,000 loss on the sale of equipment. Using the indirect method, how much is the company's cash flow from operating activities?

A) $245,000.
B) $250,000.
C)$240,000.
D)$235,000.

Question 47

Which of the following transactions increases the quality of income ratio?

A) The cash payment of an account payable.
B) The payment of a cash dividend.
C)A decrease in receivables.
D)The accrual of revenue.

Question 48

Allen Company's 2014 income statement reported total revenues, $850,000 and total expenses (including $40,000 depreciation) of $720,000. The 2013 balance sheet reported the following: accounts receivable-beginning balance, $50,000 and ending balance, $40,000; accounts payable-beginning balance, $22,000 and ending balance, $28,000. Therefore, based only on this information, how much was the 2014 net cash provided by operating activities?

A) $126,000.
B) $166,000.
C)$174,000.
D)$186,000.

Question 49

During 2014, Boogle reported net income of $785 million and net cash inflow from operating activities of $1,196 million. During 2013, Boogle's net income was $563 million and net cash inflow from operations was $1,237 million. Which of the following is incorrect about the quality of income ratios?

A) In 2013 the ratio was 2.2 and in 2014 it was 1.5.
B) The ratio in 2013 was better than the ratio in 2014.
C)Boogle's quality of income ratios indicate poor performance because net income is less than cash flow.
D)The ratio in both years shows the company's ability to generate positive cash flow from its operating activities.

Question 50

Which of the following would be added to net income when determining cash flows from operating activities under the indirect method?

A) A decrease in accounts payable.
B) Patent amortization expense.
C)An increase in prepaid insurance.
D)A gain on the sale of a depreciable asset.

Question 51

Which of the following statements does not correctly describe an adjustment to net income when determining cash flows from operating activities using the indirect method?

A) An increase in wages payable will be added to net income.
B) A gain on the sale of a depreciable asset will be subtracted from net income.
C)An increase in prepaid expenses will be subtracted from net income.
D)An increase in income taxes payable will be subtracted from net income.

Question 52

KJ Company, a manufacturer, uses the indirect method for preparing its statement of cash flows. The company has provided the following information pertaining to its recent year of operation: • Cash flow from operating activities, $136,000
• Accounts payable increased $11,000
• Prepaid assets decreased $8,000
• Depreciation expense was $12,000
• Accounts receivable increased $23,000
• Loss on sale of a depreciable asset was $6,000
• Wages payable decreased $9,000
• Unearned revenue decreased $19,000
• Patent amortization expense was $3,000
How much was KJ's net income?

A) $185,000.
B) $135,000.
C)$147,000.
D)$131,000.

Question 53

Which of the following statements about the quality of income ratio is incorrect?

A) An increase in operating assets and a decrease in liabilities will reduce operating cash flows and thereby reduce the quality of income ratio.
B) Seasonal variations in sales and purchases of inventory can cause wide deviations in the quality of income ratio.
C)When sales are growing, receivables and inventory normally increase at a faster rate than accounts payable, which often causes cash flows from operating activities to be less than net income.
D)Aggressive revenue recognition tends to increase the quality of income ratio.

Question 54

Reliance Corporation has provided the following information for the year ended December 31, 2014: • The equipment account balance increased $200,000.
• The equipment accumulated depreciation account increased $35,000.
• Equipment costing $50,000 was sold during the year resulting in a $10,000 gain.
• Depreciation expense recorded on the equipment during the year was $65,000.
Which of the following statements is correct with respect to determining cash flow from operating activities?

A) Using the indirect method, net income is increased by the $35,000 increase in accumulated depreciation.
B) Using the indirect method, net income is decreased by the $30,000 sales price of the equipment.
C)Using the indirect method, net income is increased by the $65,000 depreciation expense.
D)Using the indirect method, net income is increased by the $10,000 gain on the sale of the equipment.

Question 55

Which of the following statements does not correctly describe an adjustment to net income when determining cash flows from operating activities using the indirect method?

A) An increase in accounts receivable will be subtracted from net income.
B) A loss on the sale of a depreciable asset will be added to net income.
C)An increase in accrued liabilities will be subtracted from net income.
D)An increase in accounts payable will be added to net income.

Question 56

Rice Company, a retailer, has provided the following information pertaining to its recent year of operation: • Net income, $100,000
• Accounts receivable increased $9,000
• Prepaid insurance decreased $3,000
• Depreciation expense was $15,000
• Gain on sale of land, $2,000
• Wages payable decreased $7,000
• Unearned revenue increased $11,000
Using the indirect method, how much was Rice's net cash provided by operating activities?

A) $89,000.
B) $115,000.
C)$125,000.
D)$111,000.

Question 57

The following information has been provided to you by RKJ Company: $$\begin{array} { l r } \text { Net income } & \$ 300,000 \\\text { Decrease in accounts payable } & \$ 114,000 \\\text { Increase in inventory } & \$ 22,000 \\\text { Increase in accounts receivable } & \$ 24,000 \\\text { Decrease in bonds payable } & \$ 25,000 \\\text { Loss on sale of a depreciable asset } & \$ 19,000 \\\text { Depreciation expense } & \$ 40,000 \\\text { Decrease in income taxes payable } & \$ 12,000\end{array}$$ Using the indirect method, what is the net cash provided by operating activities?

A) $231,000.
B) $187,000.
C)$206,000.
D)$168,000.

Question 58

DJ Company, a manufacturer, uses the indirect method for preparing its statement of cash flows. The company has provided the following information pertaining to its recent year of operation: • Cash flow from operating activities, $272,000
• Accounts payable decreased $21,000
• Prepaid assets increased $15,000
• Depreciation expense was $27,000
• Accounts receivable decreased $21,000
• Loss on sale of a depreciable asset was $16,000
• Wages payable increased $10,000
• Unearned revenue decreased $16,000
• Patent amortization expense was $10,000
How much was DJ's net income?

A) $256,000.
B) $210,000.
C)$198,000.
D)$240,000.

Question 59

RM Company, a manufacturer, has provided the following information pertaining to its recent year of operation: • Net income, $300,000
• Accounts payable increased $24,000
• Prepaid rent decreased $10,000
• Depreciation expense was $35,000
• Accounts receivable increased $34,000
• Gain on sale of a building was $11,000
• Wages payable decreased $21,000
• Unearned revenue increased $44,000
Using the indirect method, how much was RM's net cash provided by operating activities?

A) $259,000.
B) $327,000.
C)$347,000.
D)$358,000.

Question 60

GJ Company, a manufacturer, has provided the following information pertaining to its recent year of operation: • Net income, $500,000
• Accounts payable decreased $42,000
• Prepaid assets increased $31,000
• Depreciation expense was $53,000
• Accounts receivable decreased $41,000
• Loss on sale of a depreciable asset was $31,000
• Wages payable increased $19,000
• Unearned revenue decreased $31,000
• Patent amortization expense was $5,000
Using the indirect method, how much was GJ's net cash provided by operating activities?

A) $545,000.
B) $607,000.
C)$514,000.
D)$463,000.

Question 61

Which of the following statements about the capital acquisitions ratio is correct?

A) A high ratio indicates less need for outside financing of property, plant and equipment.
B) The ratio is computed by dividing cash flow from operating activities by the average net property, plant, and equipment.
C)A low ratio may indicate a failure to update property, plant, and equipment, which can limit a company's ability to compete in the future.
D)The ratio is comparable across industries.

Question 62

Which of the following is correct?

A) Repayments of principal and interest reduce financing activities cash flows.
B) Purchase of common stock shares for treasury is a cash outflow connected to investing activities.
C)If a company borrows $450 million in long-term notes and repays $380 million of long-term notes, these items must both be disclosed separately and not netted against each other in the financing section of the cash flow statement.
D)Issuing common stock in exchange for the purchase of a building creates both a financing activity and investing activity cash flow.

Question 63

Which of the following would be a financing activities cash flow?

A) Common stock dividends received from an investment in another company.
B) Interest payments.
C)Purchase of treasury stock.
D)Purchase of a building by signing a note payable.

Question 64

During 2014, Eva's Enterprises cash paid for property, plant and equipment was $755 million and cash flow from operating activities was $5,968 million. The average property, plant, and equipment from the comparative balance sheets were $6,094 million. Eva's capital acquisitions ratio for 2014 is closest to:

A) 1.0
B) 5.3
C)7.9
D)6.0

Question 65

Which of the following transactions would be reported within the investing section of the cash flow statement?

A) The cash sale of land at a loss.
B) The purchase of a building in exchange for common stock.
C)The receipt of a stock dividend from a stock investment.
D)The cash receipt of a dividend from a stock investment.

Question 66

A company acquired some land (independently appraised at $12,000) and paid for it by issuing 1,000 shares of its common stock (par $10 per share; no market price was quoted). How should this be reported on the statement of cash flows?

A) Report $12,000 as inflow and outflow of cash.
B) Report $12,000 as an inflow of cash.
C)The transaction should not be reported on the statement of cash flows.
D)Report in a schedule of significant noncash investing and financing activities.

Question 67

Burich Co. reported short-term borrowings of $2.5 million, long-term borrowings of $6.8 million, repayments of long-term borrowings of $3.5 million, interest payments of $780,000, purchase of common stock shares for treasury of $.5 million, and cash dividends declared of $1.1 million. What is the cash flow from financing activities?

A) $5,300,000 net cash inflow.
B) $4,200,000 net cash inflow.
C)$1,700,000 net cash inflow.
D)$2,800,000 net cash inflow.

Question 68

Lab Industries, Inc., issued $50,000 of bonds, paid cash dividends of $8,000, sold long-term investments for $12,000, received $5,000 of dividend revenue, purchased treasury stock for $15,000, and purchased new equipment for $19,000. What is the net cash flow from financing activities?

A) $70,000 inflow.
B) $27,000 inflow.
C)$80,000 inflow.
D)$20,000 outflow.

Question 69

Which of the following is reported as a cash flow from investing activities?

A) Cash received from dividends earned.
B) Purchasing land in exchange for common stock.
C)Selling a long-term investment at a loss for cash.
D)Cash received from interest earneD.The investing cash flows section of the cash flow statement includes cash flows from the sale of investments.

Question 70

During 2014, Edna Enterprises had a capital acquisitions ratio of 8.0. During 2014, Carlos' Corporation had a capital acquisitions ratio of 3.4. The amount of cash flow from operating activities was $5,968,000 for Edna's and $5,054,000 for Carlos. Which of the following statements is incorrect?

A) Edna used less cash for investments in property, plant and equipment during 2014 than did Carlos.
B) Compared to Carlos, Edna's capital acquisitions ratio is higher which indicates that Edna has less need for external financing of its investments in property, plant, and equipment.
C)Edna invested approximately $746,000 in property, plant, and equipment during 2014.
D)Carlos invested approximately one-half the amount that Edna invested in property, plant, and equipment during 2014.

Question 71

Milliken Company paid $2.2 million to purchase stock in another company, $1.0 million to repurchase treasury shares, $.5 million to buy short-term investments, sold used equipment for $.8 million when its book value was $.6 million, and purchased new equipment for $3.4 million. What was the net cash flow from investing activities?

A) $6.3 million net cash outflow.
B) $5.3 million net cash outflow.
C)$5.1 million net cash outflow.
D)$4.8 million net cash outflow.

Question 72

Significant noncash financing and investing activities

A) must be reported in the notes to the financial statements.
B) are not separately disclosed within the financial statements.
C)are disclosed in a separate schedule as a supplement to the statement of cash flows.
D)are reported as cash flows because of their significance.

Question 73

Roberts Company sold equipment for $250,000, purchased a building for $6,500,000, sold short-term investments for $280,000, repaid principal on a note payable for $2,300,000 plus $230,000 of interest, and paid cash dividends of $20,000. What was the net cash flow from investing activities?

A) $6,250,000 outflow.
B) $8,320,000 outflow.
C)$8,270,000 outflow.
D)$5,970,000 outflow.

Question 74

Flow Company has provided the following information for the year ended December 31, 2014: • Cash paid for interest, $20,000
• Cash paid for dividends, $6,000
• Cash dividends received, $4,000
• Cash proceeds from bank loan, $29,000
• Cash purchase of treasury stock, $11,000
• Cash paid for equipment purchase, $27,000
• Cash received from issuance of common stock, $37,000
• Cash received from sale of land with a $32,000 book value, $25,000
• Acquisition of land costing $51,000 in exchange for preferred stock issuance
• Payment of a $100,000 note payable by exchanging used machinery with a $77,000 book value and $100,000 fair value
How much was Flow's net cash flow from investing activities?

A) A net outflow of $2,000.
B) A net inflow of $2,000.
C)A net outflow of $53,000.
D)A net inflow of $49,000.

Question 75

Flow Company has provided the following information for the year ended December 31, 2014: • Cash paid for interest, $20,000
• Cash paid for dividends, $6,000
• Cash dividends received, $4,000
• Cash proceeds from bank loan, $29,000
• Cash purchase of treasury stock, $11,000
• Cash paid for equipment purchase, $27,000
• Cash received from issuance of common stock, $37,000
• Cash received from sale of land with a $32,000 book value, $25,000
• Acquisition of land costing $51,000 in exchange for preferred stock issuance
• Payment of a $100,000 note payable by exchanging used machinery with a $77,000 book value and $100,000 fair value
How much was Flow's net cash flow from financing activities?

A) A net outflow of $51,000.
B) A net inflow of $29,000.
C)A net outflow of $53,000.
D)A net inflow of $49,000.

Question 76

Canadian Beer reported equipment sold for $222 million cash and new equipment purchased $1,515 million cash. The equipment sold had a net book value of $150 million. Cash flow from investing activities would show:

A) An inflow of $222 million and outflow of $1,515 million.
B) An inflow of $222 million and outflow of $150 million.
C)Cash paid for equipment of $1,293 million.
D)A net outflow of $1,365 million.

Question 77

Which of the following transactions would not be reported within the investing section of the cash flow statement?

A) The cash sale of land at a gain.
B) The purchase of a building for cash.
C)The purchase of a stock investment for cash.
D)The cash receipt of a dividend from a stock investment.

Question 78

Roberts Company sold equipment for $250,000, purchased a building for $6,500,000, sold short-term investments for $280,000, repaid principal on a note payable for $2,300,000 plus $230,000 of interest, and paid cash dividends of $20,000. What was the net cash flow from financing activities?

A) $2,300,000 outflow.
B) $2,320,000 outflow
C)$2,530,000 outflow.
D)$2,550,000 outflow.

Question 79

Which of the following statements about the capital acquisitions ratio is incorrect?

A) The ratio is computed by dividing cash flow from operating activities by cash paid for property, plant, and equipment.
B) Because the need for investment in property, plant, and equipment differs dramatically across industries, a firm's ratio should only be compared with its prior years' ratio or with firms in the same industry.
C)A high ratio indicates more need for outside financing of current and future purchases of property, plant, and equipment.
D)The ratio increases when an account receivable is collecteD.The capital acquisitions ratio is calculated by dividing cash flow from operating activities by cash paid for property, plant, and equipment. A high ratio demonstrates less need for outside financing.

Question 80

Which of the following transactions decreases the quality of income ratio?

A) The cash purchase of equipment.
B) The issue of stock in exchange for cash.
C)Collecting cash for services to be provided in the future.
D)Earning revenue that was previously recorded as unearned revenue.